Interest Rates Are Difficult To Reduce Because Of High Inflation

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At the on going session of the National Assembly, there has been a request of the State Bank of Vietnam (SBV) to continue reducing the lending interest rate to support the business community. It must be immediately stated that these proposals are completely legitimate and also originate from the desire to support enterprises to reduce capital costs to expand production and business, thereby boosting the stronger economic growth.

It is also the desire of the SBV as well as commercial banks when banks clearly determine that the relationship between banks and businesses is symbiotic, in which healthy businesses will support banks to operate safely and effectively. In the conference of deploying banking tasks in 2019 at the beginning of the year, responding to the signal of the SBV’s Governor, four big state-owned commercial banks have reduced the interest rates of all terms for priority areas by 0.5 percent.

As in its executive instructions, SBV frequently requires credit institutions to actively balance their financial ability to apply reasonable lending rates on the basis of deposit rates and risk levels of the loans, ensuring financial security.

However, in the current context, it is extremely difficult to reduce interest rates, and it does not depend on the subjective will of the banks even though they also want to. In theory, to reduce lending interest rates, there are only two ways including to reduce operating costs to lower the net interest margin (NIM) and to decrease input costs.

But the banks’ NIM has dropped to the lowest level after the lending interest rates have been gone down faster than the deposit rates in recent years, so it is difficult to reduce further. Indeed, according to BVSC Securities Company, the industry’s NIM in 2019 is forecasted at about 3.2 percent. Some banks will be under pressure to reduce NIM due to high loan to deposit ratio (LDR). While according to the recommendations of the big credit rating agencies in the world, in order for the system of credit institutions to develop well, the NIM must reach at least 3.5 percent.

Therefore, in order to reduce interest rates, the only solution is to reduce deposit rates. But that is also tough in the context of rising inflation today. Statistics show that CPI in May increased by 0.49 percent compared to the previous month, which is the second highest monthly increase since October 2018, lower than the increase of 0.8 percent in February 2019, which is the Lunar New Year. Notably, the average CPI rose continuously in the first five months of the year, now reaching 2.74 percent.

The pressure on inflation is still very large from both external and internal economy. Although world oil prices have turned down recently, they may rebound anytime in the context of the tension among the US, Iran and Venezuela. Besides, escalating US-China trade war is also making the financial and global commodity market highly volatile, thereby affecting the exchange rate and inflation of many emerging economies including Vietnam.

In domestic market, the increase of 8.36 percent in electricity prices will certainly continue to affect the general price level in the near future. Meanwhile the return of trade deficit will also put pressure on exchange rates and inflation, especially the roadmap to adjust prices of goods and services managed by the State.

Therefore, in the latest two scenarios of growth and inflation, the Vietnam Institute for Economic and Policy Research (VEPR) forecasts that inflation this year will range from 4.21 percent to 4.79 percent; in which high inflation risk may occur if the inflationary pressure gets greater from inside and outside.

It can be said that inflation is making it difficult to reduce deposit rates because it has to ensure positive realities to attract depositors. Not to mention, currently the exchange rate is also under pressure and to stabilise the exchange rate, it is necessary to maintain the interest rate in dong at a rather high level compared to the interest rate in US dollar to encourage people to hold dong.

Following the recommendations of VEPR economists, “to curb inflation, the executives will need to continue to follow the price movements in the second half of 2019. SBV needs to be cautious about regulating money supply, interest rates and credit in the near future if it wants to maintain the inflation within the target level “.

 

Category: Finance, Vietnam

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